By Andy Ives, CFP®, AIF®
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When an IRA or retirement plan owner reaches a particular age, that account owner typically must begin taking required minimum distributions (RMDs.) The RMD is calculated based on the year-end account balance divided by a life expectancy factor. Of course, there is a parade of variables to consider, including:
- Are we using the Uniform Lifetime Table or the Joint Life Table?
- Is this an inherited account and therefore using the Single Life Expectancy Table?
- At what age do lifetime RMDs begin – 70 ½, 72 or 73?
- If this is a work plan like a 401(k), do RMDs even apply if the person is still working?
- Is this a Roth IRA? If so, lifetime RMDs do not apply.
- Is this an inherited Roth IRA? If so, RMDs could potentially apply.
- Do I consider the Roth money in my 401(k) in the RMD calculation? (No, starting 2024.)
- Which accounts can be aggregated for the RMD calculation, and which cannot?
On and on the list goes. Is it any wonder some people freeze in the spotlight? Is it any wonder RMDs get missed? Of course not. And in the past, if all or a portion of an RMD was not timely withdrawn, there was a significant penalty of 50%. (That penalty has since been reduced to 25% by SECURE 2.0, and further to 10% if the error is corrected within, typically, two years.)
Fortunately, if an RMD was missed, the IRS has been agreeable to waiving the penalty for good cause. In fact, the proposed SECURE Act regulations added a couple of automatic missed RMD penalty waivers in certain situations – like for a missed year-of-death RMD if the RMD is taken by the beneficiary’s tax filing deadline, including extensions.
Additional RMD penalty waiver language contained in Section 313 of SECURE 2.0 has, curiously, received less fanfare. This section adds a 3-year statute of limitations for missed RMDs. Meaning, if an RMD is missed, the 25% penalty is only applicable for the next three years. After that, it falls off the books.
Example: Robert inherited an IRA from his sister back in 2017. He was supposed to start taking annual RMDs in 2018, but he did not. In fact, Robert has never taken an RMD from the inherited IRA. Prior to SECURE 2.0, Robert faced a potential penalty for every year he missed taking the RMD. However, under the new guidelines, Robert may only need to be concerned about the previous 3 years – 2020, 2021 and 2022. And in fact, since the CARES Act waived all RMDs for 2020, Robert may only have two years of missed RMDs to account for – 2021 and 2022.
But be forewarned! SECURE 2.0 is not perfectly clear. The legislation is not precise. The example above is one interpretation of the law. Others argue that the 3-year statute of limitations begins with the enactment date of SECURE 2.0 – which was the end of 2022. This more conservative analysis believes the missed RMD penalty still applies in years prior to SECURE 2.0 (meaning Robert in the example above must still account for 2018 and 2019).
Nevertheless, be aware that a 3-year statute of limitations for missed RMDs does, in fact, exist. How the legislation is to be applied awaits IRS guidance.